When comparing mortgages, it is easy to focus on the interest rate.
However, the interest rate is only one part of the cost.
Mortgages can also include fees and charges. Some are paid when you apply. Others may apply later.
Therefore, it is important to look at the total cost of the mortgage deal.
Why Do Mortgage Fees Matter?
Mortgage fees can add a large amount to your costs.
For example, imagine you are comparing two mortgages.
Mortgage A
Interest rate: 4.20%
Product fee: £1,499
Mortgage B
Interest rate: 4.35%
Product fee: £0
Mortgage A has the lower rate.
However, you must pay £1,499 to get the deal.
Therefore, Mortgage A is not always the cheaper choice.
The amount you borrow and how long you keep the deal will also matter.
What Is a Product Fee?
A product fee is a charge for taking a particular mortgage deal.
It may also be called an arrangement fee.
Some mortgages have no product fee. Others may charge £1,000 or more.
Therefore, always check the fee as well as the interest rate.
Can a Product Fee Be a Percentage?
Yes.
Some lenders charge a percentage of the mortgage instead of a fixed amount.
This is more common with some buy-to-let mortgages.
For example:
Mortgage: £200,000
Product fee: 2%
The fee would be:
£200,000 × 2% = £4,000
A percentage fee can become expensive on a large mortgage.
Therefore, check whether the fee is fixed or based on the amount borrowed.
Can You Add the Fee to Your Mortgage?
Some lenders allow you to add the product fee to the mortgage.
For example:
Mortgage: £200,000
Product fee: £1,500
If you add the fee, the mortgage becomes:
£201,500
This means you do not need to pay the £1,500 upfront.
However, you are borrowing more.
As a result, you may also pay interest on the fee.
Should You Pay the Fee Upfront?
There is no single answer.
Paying upfront keeps the fee out of your mortgage. Therefore, you will not pay mortgage interest on it.
However, it also uses some of your savings.
Adding the fee to the mortgage reduces the amount you need upfront. However, it can increase the total amount you repay.
Therefore, consider both options.
What Is a Booking Fee?
Some lenders charge a booking fee.
This may also be called a reservation fee.
You may need to pay it when you apply for the mortgage.
Importantly, the fee may not be refunded if the mortgage does not go ahead.
Therefore, check the terms before paying.
What Is a Valuation Fee?
A lender may arrange a mortgage valuation.
This helps the lender check the property’s value.
Some lenders charge for this. Others provide a basic valuation without a separate fee.
The cost can depend on the property and lender.
Is a Mortgage Valuation a Survey?
Not necessarily.
A mortgage valuation is mainly for the lender.
It helps the lender decide whether the property is suitable for the mortgage.
It is not designed to give you a full report on the property’s condition.
Therefore, you may want a separate survey.
What Is a Survey Fee?
A survey gives you more information about the property.
For example, it may identify:
- roof problems
- damp
- structural concerns
- repairs that may be needed
Different types of survey provide different levels of detail.
More detailed surveys usually cost more.
However, they may uncover problems that could be expensive to fix.
The process is different in Scotland. Most homes marketed for sale there have a Home Report, although exceptions apply.
What Are Legal Fees?
You will normally need a solicitor or conveyancer when buying a property.
They deal with the legal work.
This can include:
- checking the property information
- dealing with the mortgage
- transferring money
- registering the change of ownership
The process differs across the UK.
Therefore, legal costs can also vary.
Are Legal Fees Ever Included?
Sometimes.
For example, some remortgage deals include basic legal work.
Other deals may provide money towards your legal costs.
However, not everything may be included.
Therefore, check what the mortgage deal actually covers.
What Are Broker Fees?
You may use a mortgage broker to help find and arrange your mortgage.
Some brokers charge you a fee.
Others receive payment from the mortgage lender.
Some may receive lender commission and also charge a customer fee.
Therefore, ask about costs before using a broker.
What Is an Early Repayment Charge?
An Early Repayment Charge (ERC) may apply if you leave or repay your mortgage early.
ERCs are common during fixed-rate deals.
For example:
Mortgage balance: £180,000
ERC: 2%
The charge could be:
£180,000 × 2% = £3,600
Therefore, changing your mortgage early could be expensive.
Do Early Repayment Charges Reduce Over Time?
Sometimes.
For example, a five-year fixed mortgage may have a different ERC in each year.
The charge could become smaller as the deal gets closer to its end.
However, this depends on the mortgage.
Therefore, always check the exact terms.
Can Overpayments Lead to a Charge?
Yes, they can.
Many mortgages allow some overpayments without an ERC.
However, there may be a limit.
For example, your lender may allow you to repay a certain amount each year without a charge.
If you go above the limit, an ERC may apply.
Therefore, check the rules before making a large overpayment.
What Is a Mortgage Exit Fee?
Some lenders charge a fee when your mortgage account closes.
This can have different names.
For example:
- mortgage exit fee
- account fee
- administration fee
- deeds release fee
Not every mortgage has one.
Therefore, check the fees before choosing a deal.
What Is Mortgage Redemption?
Mortgage redemption simply means paying off your mortgage.
This may happen when you:
- sell your home
- remortgage
- reach the end of the mortgage
- repay the mortgage early
Some fees may apply when you do this.
Also, an ERC may apply if you repay the mortgage during a restricted period.
What Are Transfer Fees?
There may be small charges for transferring money during the mortgage process.
For example, a lender or solicitor may charge for sending mortgage funds.
These fees are usually much smaller than the mortgage itself.
However, they still add to your buying costs.
What Is a Higher Lending Charge?
Some lenders may charge a fee when you borrow a high share of the property’s value.
This is sometimes called a higher lending charge.
Not all lenders use this type of charge.
Therefore, check the mortgage details carefully.
What Is a Mortgage Illustration?
A mortgage illustration gives you important information about a mortgage.
It can show:
- the interest rate
- monthly payments
- mortgage fees
- mortgage term
- Early Repayment Charges
- what happens when the deal ends
It can help you understand the mortgage before you agree to it.
Therefore, read the illustration carefully.
What Is APRC?
APRC stands for Annual Percentage Rate of Charge.
It is designed to show the overall yearly cost of a mortgage as a percentage.
It includes the interest rate and certain other costs.
However, APRC is based on several assumptions.
For example, it may assume that you keep the mortgage for the full term.
Many people change their mortgage deal before then.
Therefore, APRC can be useful for comparison, but do not rely on it alone.
What About Property Taxes?
Property taxes are not mortgage fees.
However, they can add a large amount to the cost of buying a home.
The tax system depends on where the property is located.
Scotland
Scotland uses Land and Buildings Transaction Tax (LBTT).
Extra tax may apply when buying an additional property.
England and Northern Ireland
Stamp Duty Land Tax (SDLT) may apply.
Wales
Wales uses Land Transaction Tax (LTT).
Therefore, check the current rules before working out your buying budget.
What About Insurance?
Insurance is another cost to consider.
For example, you will normally need suitable buildings insurance.
Your lender may require this as part of the mortgage.
You may also choose other types of insurance.
Therefore, include insurance when planning the cost of owning your home.
Are Mortgage Fees Refundable?
Some are. Others are not.
For example, you may pay a fee when applying for a mortgage.
If the mortgage does not go ahead, you may not get that money back.
Therefore, ask whether a fee is refundable before paying it.
Is the Lowest Mortgage Rate Always Best?
No.
This is an important point.
Consider these two deals:
| Mortgage A | Mortgage B | |
|---|---|---|
| Interest rate | 4.20% | 4.35% |
| Product fee | £1,999 | £0 |
| Deal period | 2 years | 2 years |
Mortgage A has the lower rate.
However, it also has a £1,999 fee.
You need to work out whether the lower rate saves enough to cover that fee.
Therefore, compare the overall cost, not just the rate.
Does the Size of Your Mortgage Matter?
Yes.
Suppose two borrowers are considering a mortgage with a £1,500 product fee.
One is borrowing £80,000.
The other is borrowing £400,000.
The fee is the same for both.
However, the benefit of a lower interest rate could be much greater on the £400,000 mortgage.
Therefore, the best deal can depend on how much you borrow.
Does the Length of the Deal Matter?
Yes.
Suppose you pay a £1,500 fee for a two-year fixed deal.
After two years, you may arrange another mortgage deal.
That could mean paying another product fee.
In contrast, a five-year deal spreads its fee across a longer period.
However, a longer deal may have other limits or costs.
Therefore, consider how long you expect to keep the mortgage deal.
What About Cashback?
Some mortgage deals offer cashback.
For example, a lender may offer:
£500 cashback
This can help with moving costs.
However, the mortgage may have a higher rate or different fees.
Therefore, do not choose a mortgage simply because it offers cashback.
Compare the whole deal.
What Does Fee-Free Mean?
A mortgage may be advertised as fee-free.
This usually means that certain mortgage fees are not charged.
However, it does not mean buying the property will cost nothing.
You may still need to pay for:
- legal work
- surveys
- property taxes
- insurance
- moving costs
- broker fees
Therefore, check exactly what is included.
How Should You Compare Mortgage Costs?
Start with the interest rate.
Then look at the fees.
Also, check how long the mortgage deal lasts.
For example, when comparing two-year deals, look at the cost over those two years.
Consider the:
Monthly mortgage payments
Product fees
Other mortgage charges
Cashback or incentives
Also, look at how much you will still owe at the end of the period.
This gives you a much better comparison.
Don’t Forget Your Deposit
Your deposit is separate from mortgage fees.
For example, suppose you have £30,000 saved.
You may be tempted to use the full amount as your deposit.
However, you could then have nothing left for legal costs, fees or moving expenses.
Therefore, work out your other costs before deciding how much to use as a deposit.
Keep Some Money Available
Buying a home can bring unexpected costs.
For example, you may need:
- repairs
- new furniture
- appliances
- decorating
- emergency work
Therefore, it can be useful to keep some savings available after you move.
A slightly larger deposit is not always worth leaving yourself with no emergency fund.
Before Choosing a Mortgage
Ask yourself:
What is the interest rate?
What is the product fee?
Are there any other upfront fees?
Can fees be added to the mortgage?
Will I pay interest on those fees?
Are any fees refundable?
Are there Early Repayment Charges?
How long does the deal last?
What happens when the deal ends?
What will the mortgage cost over the time I expect to keep it?
These questions can make mortgage deals much easier to compare.
The Key Point
A mortgage is more than an interest rate.
A deal with a very low rate may have high fees.
Another deal may have a slightly higher rate but very low fees.
Therefore, look at the total cost of the mortgage.
Consider the rate, fees, charges and length of the deal together.
Most importantly, do not assume that the mortgage with the lowest advertised rate is the cheapest.
The best comparison is based on what the mortgage will actually cost you.